NEW YORK (TheStreet) -- Doug Kass of Seabreeze Partners is known for his accurate stock market calls and keen insights into the economy, which he shares with RealMoney Pro readers in his daily trading diary.
Among the posts this past week were items about inflation and Baxter International.
Please click here for information about subscribing to RealMoney Pro.
Parsing the Data
Inflation in February as measured by the PCE deflator, the Fed's preferred gauge more so than CPI, rose +0.1% month over month both headline and core and +0.9% and +1.1% year over year headline and core, respectively. The near-7% increase in the CRB index in February was not at all captured in this figure, as it will take some time to work its way through (mostly food). Also, housing is a much smaller contribution to PCE than CPI and therefore doesn't fully reflect the near-3% gains in rents. PCE has a higher medical care component, which has recently been more benign of late.
The Fed doves will worry about disinflation; the hawks will know it's backward-looking. The labor market as measured by the unemployment rate is tighter than thought, and rates shouldn't be at zero anyway at this stage of the cycle, let alone still conducting QE.
Income and spending both rose +0.3% month over month nominally and +0.2% real, and the savings rate rose to 4.3% from 4.2%. Income growth is a key factor in whether the U.S. economy will accelerate from here, and it's up 3.1% year over year vs. 4.1% in January and compares to the 20-year average of 4.7% growth.
With respect to spending, part of the increase, according to the BEA, is related to health care services demanded by Obamacare, where spending was up by $13 billion in February following $20 billion in January. Spending on durable goods fell for a third straight month.
Bottom line: Nothing in this data is market moving today, and bonds didn't budge on the benign inflation data, as it doesn't alter for now the future path that the Fed is expected to take on its exit.
Loading Up on Baxter Long
Originally published on Saturday, March 28, at 8:48 a.m. EDT
In an attempt to boost innovation, raise profitability and reward shareholders, Baxter (BAX) has announced that the company is separating into two parts -- one for developing and marketing biopharmaceuticals, and one for medical products. Additional benefits include a greater management focus on the separate franchises, as well as the ability to more effectively commercialize new and existing offerings and the flexibility to pursue respective growth.
The split will come in the form of a tax-free distribution -- of new publicly traded stock in the biopharmaceuticals company -- to Baxter shareholders. The transaction is expected to be completed by mid-2015.
The share price of Baxter initially climbed to about $76, and it has since traded down a few dollars.
The case for Baxter is straightforward, and it is as follows.
Value is unlocked as the new biopharma company is valued more closely with its peers.
The key catalysts for improving the outlook for Baxter's BioScience business are set to come in the third quarter of this year: the data release of BAX 855; an Eloctate launch that may be more gradual than expected; and U.S. approval and launch of HyQvia.
Using reasonable metrics -- a price-to-earnings multiple of 16x for medical products and 18x for the new biopharmaceuticals spin-out -- a sum-of-the-parts valuation yields a 12-month share-price objective of $90, or more than 20% above Thursday's closing price.
Baxter is going on my Best Ideas List, and I plan to buy stock today.
I will have more on my Baxter analysis next week.At the time of original publication, Kass had no positions in the investments mentioned.